Companies 'woefully unprepared' for audit reforms - EY

Main points

One in five UK companies are 'woefully unprepared' for the new EU audit rotation reforms.

Only a quarter of FTSE 350 companies have tendered their audit.

Audit rotation changes come into effect in June this year.

One in five UK companies are 'woefully unprepared' for the new EU audit rotation reforms coming into force in June, according to research by EY.

Data from the Big Four firm's survey of 100 CFOs, tax directors and audit committee chairs shows a 'concerning' number of UK companies still do not fully understand what they should be doing to prepare for the changes.

From June this year, Public interest entities – including listed companies, banks, building societies and relevant insurers – will be required to put their audit out to tender every 10 years and change their auditor at least every 20 years.

Of the 100 surveyed by EY, 19% didn’t know when their company needed to tender or rotate its audit, 28% lacked full understanding of the proposed restrictions on non-audit services, and 7% knew nothing at all of the changes.

Hywel Ball, EY's managing partner of assurance in the UK and Ireland, said that he is most concerned about the lack of preparation from the FTSE 350 in relation to the reforms.

He said: “As expected some companies have been moving ahead of the regulations, with over half of the FTSE 100 having tendered their audit since the spectre of the regulations loomed. But we haven’t seen the same level of preparation among the rest of the FTSE 350, with less than a quarter having tendered so far."

Cost seems to be a major factor holding companies back from making the required changes, with 21% of those surveyed saying the transition will cost 20-50% of their current annual audit fee. 57% of respondents quoted 10-20% of their current fee.

"This was never going to be a cost free exercise," Hywel went on to say.

"But despite these cost implications, regulators should be encouraged that audit committees have been placing audit quality at the heart of their decision making processes, rather than focussing purely on fees."

Some of the key objectives of the EU reforms are to improve audit quality, restore investor confidence in financial information and improve choice and competition.